TMFMmbop (30.99)

Remember Dollars Spend

7

We're generally bearish on the US dollar for the long-term at Global Gains, but that doesn't mean investors should go rushing into other more speculative currencies. I was reminded of this as I watched the premiere of The Amazing Race on CBS the other day. Here's what went down in that episode:

But the confusion and cluelessness that clouded several teams' decisions started before the flight even took off. Brothers/cowboys Jet and Cord (you can't make up these names) exchanged their U.S. dollars for Brazilian currency, rather than Chilean, as it was the "closest" thing that the currency exchange had on offer.

To compound this mistake the brothers found when they reached Chile that the bus driver there would happily take payment in US dollars, but had no interest in touching their reais.

Now, in their defense, American airports only offer a few currency options (Chile generally not among them), so it's not like they chose Brazlian money of Chilean money. Rather, they picked the option closest to Chile. Sutpid, yes, but no inexplicable for someone who doesn't do a whole lot of interenational traveling.

The lesson, though, is that dollars spend. I've traveled many places in the world, and if we don't have local currency, cab drivers, shopkeepers, etc. are always more than happy to take dollars (this is particularly true in places such as Vietnam where the black market exchange rate differs dramatically from the official exchange rate). Thus, there's a cost to giving up your dollar when you invest, so you want to make sure you're being compensated for that as you choose international investments.

Of course dollars are accepted openly throughout the world. For decades, the currency stood as a mountain ... indeed a symbol of relative stability compared to dastardly performances by many other fiat currencies. We all have those memories: I recall joking with family members as a kid about the high-level math required to perform exchange rate calculations with the Italian Lira. We all remember Canadian quarters being returned to us by cashiers, right? I went to Costa Rica in the nineties to volunteer for 9 months in a rainforest preserve, and the $600 I managed to accrue by selling my car beforehand sufficed to bankroll my entire stay. Sure, the dollar was relatively stable for a while as the most widely accepted currency in the world, but that condition is fading quickly into history.

However, conditions can change well before knowledge of the implications of those changes would reach the streets of Lima, Peru or the markets of Vietnam. If the hordes here at home still don't comprehend the enormity of our currency crisis, how can we expect that laborers in places where financial education consists of survival of the fittest to comprehend what has happened to the dollar since this crisis began.

To argue that the dollar retains some kind of special status because it remains coveted by the ill-informed is not one that leaves me perceiving a cost to shedding dollar exposure. How far negative do you suppose that "cost" can go when we awake one morning to find that a single failed Treasury auction or a single pronouncement of dollar-shedding by the BRICs has dropped our beloved dollar through the floor?

Normally, I might take this opportunity to point out that one currency alternative to the dollar is both non-speculative (see my comments here and this discussion of speculation) and similarly coveted around the world ... whether in those Vietnamese markets or the streets of Chile. Normally, I would take this opportunity to suggest that this currency makes a great companion to the solid global equity investments that you recommend at GG as another means to skirt dollar exposure while retaining upside to enormous growth potential. Normally, I would remind Fools to consider gold, silver, and related growth equities (miners) among a range of rational dollar-averse investment strategies, but unfortunately I now know what you think of people who buy gold.

I think you know that that the title of that article (Only an Indiot Would Buy This Today) is tongue in cheek. In fact, it details the breathless bubble claims that various pundits have made about all sorts of asset classes before coming 'round to the conclusion "In order to make money in the stock market -- which we all want when we're trying to "protect" our portfolios -- you need take a long-term view, diversify across asset classes, and commit to buying great companies at great prices whenever the market gives you the opportunity."

Gold would be included among those asset classes. Sorry for the misunderstanding.

The alternative title to that could have been "Only an Idiot Would NOT Buy This Today," and the article would not have had to change much.

Gotcha ... I didn't read it that way my first time through, so thanks for setting me straight :) Sorry for being so blunt above ... as you can tell I take very seriously my efforts to reduce peoples' confusion when it comes to gold.